Material assets may be the way to go
For years, almost reflexively, portfolio managers have recommended that a portfolio of equities contain a five-percent holding in gold.
Is it time to re-think that percentage? With the U.S. budget deficit at well over $400 billion, the surging demand for natural resources and precious metals from India and China, the struggling U.S. dollar, and the now ever-present threat of terrorist attacks and epidemics, it may time to increase it- maybe substantially.
In the past few years, the price of hard assets and natural resources have soared. Oil, copper, gold, coal, water, etc. are in ever-increasing demand as the global economy rapidly expands. It seems that even some third-world countries have gone from agrarian economy to technology-driven economies while almost by-passing the industrial economic stage. Though “ink on paper” assets such stocks, bonds, and cash still have value, their worth is increasingly being squeezed by the hard asset demands of burgeoning economies.
Would it be profitable, then, to own more of what the world seems to be demanding? Would it make sense to re-calibrate the “normal” percentage of hard assets to a level as high as15 or 20 percent?
Each person’s risk tolerance is different and it is their advisor’s job to anticipate, explain and educate their clients about the import of these economic trends. They also need to inform their clients that, by sticking with old formulas, they may be potentially increasing rather than managing risk in their portfolios.
The explosion of paper assets in the latter part of the 1990s seems a distant memory- notwithstanding the bitter taste of stock-price collapse, corporate malfeasance, and loss of wealth. While the Federal Reserve’s raising of short-term rates may induce a slowdown in the U.S. economy, or even a recession, unless and until that happens, investors may wish to consider moving more of their dollars into natural resources or hard asset companies which are positioned to benefit from strong global demand. They may also wish to become more vigilant about the sectors of the economy that rely on the value of paper assets.
Simply put, it’s time to think “hard.”
Scott Smith is a partner with Beacon Investment Management, LLC. (www.beaconinvestments.com ) with offices in Boston and Manchester-by-the-Sea. A long-time Beverly resident, Smith has over 20 years of investment advisory experience and is also an Investment Advisor Representative of Commonwealth Financial Network, Member NASD.